Transcript of meeting of the Executive Directors of the Bank and IDA, held on Tuesday, March 14, 1995

1 NM INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Tuesday, March 14, 1995 Washington, D.C. The meeting of the Executive Directors was convened at 10:03 a.m. in the Board Room, 700 Eighteenth Street, N.W., Washington, D.C., Mr. Gautam S. Kaji, Chairman, presiding. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  2 C O N T E N T S ITEM PAGE 4 Other Business: Briefing by Mr. Burki 41 MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  41 MR. KAJI: MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  42 Under other business, if the Board will permit me, I thought, given that there have been some rapid developments in recent days on some of the countries in Latin America and the Bank's response thereto, I thought it would be useful to brief the Board quickly in terms of what is happening and what we are doing. I realize that it would have been nicer if we had been able to provide you some advanced notification that we were going to bring up this item, but very frankly events were unfolding as of late yesterday, and it is only at the pre-Board meeting this morning that we decided it would be useful to keep the Board posted at this stage. I am going to ask Mr. Burki, the Regional Vice President, to give us a briefing. We will circulate his briefing to all of you so that you do have an ability to brief yourselves and your authorities. Javed. MR. BURKI: Thank you, Mr. Chairman. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  43 As you said, events are unfolding very rapidly. The statement that I am going to make was written in a bit of a haste last night, but I will try and reflect the situation as it is today and was yesterday. Last week was a difficult one for the major economies of Latin America. In the first four days of the week, the Sao Paulo Exchange declined by 29 percent, the Buenos Aires Exchange by 13 percent, and the Mexican Exchange continued its declining trend and fell by another 4 percent. There was increased pressure on the Mexican peso, which at one point dropped to eight pesos to the dollar. The Brazilian rial also came under pressure with the Central Bank intervening 32 times on Thursday to make the new currency band take hold. The new band is holding with the rial trading around the middle. Friday saw a considerable improvement with the Brazilian stocks increasing by 24 percent and the Argentine market picking up the entire loss of the previous four days. The Mexican peso staged a recovery and improved to 6.3 pesos to the dollar on Friday. It fell a little yesterday and closed at 6.45 pesos. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  44 The improvements on Friday and yesterday were largely the result of major policy changes announced by the three governments. However, the secondary effects of the Mexican peso crisis have now begun to be felt in all three countries. In Mexico and Argentina, the financial sector has come under great stress. In Brazil, there is concern about the switch in the trade balance from a healthy surplus to a sizable deficit in the last three months. Let me now say a word about Mexico and Argentina, because in these two countries we are involved in developing new operations. Late last week, Finance Minister Germand Ortiz (Phonetic) announced a new plan for stabilizing the Mexican economy. The plan relies heavily on fiscal retrenchment as an anchor for maintaining macroeconomic stability. Expenditure cuts of 9 to 10 percent, and new taxes, including an increase in the value-added tax, from 10 percent to 15 percent, and an increase in energy and electricity prices are expected to produce an operational surplus during 1995 of 4.4 percent. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  45 The administration expects GDP to decline by 2 percent over 1995, and expects an average inflation rate of 42 percent during the year. We have begun work on two new operations in support of the government's program. These are based on intensive work already done by the World Bank in the sectors of social safety nets and banking reform. We expect to bring to the Board an operation to protect and make more effective half a dozen social programs aimed at aiding the poor, the people likely to be most affected by the stabilization effort launched by the government. We are also working on a project to reform the private banking sector in Mexico with emphasis on institutional reform, updating of accounting practices, and independent audits of the entire banking system. Now, let me turn to Argentina. The Argentine Government has also launched an ambitious program to improve its fiscal circumstances. Last evening, the government announced an agreement with the Fund, aimed at a profound improvement in the country's fiscal situation. The situation in Argentina has to be seen in the context of the convertibility law, which has provided an MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  46 anchor to the economy during this phase of stabilization. However, with the Argentines relying on a currency board operation, they have to provide a comfort zone to their banking sector by creating secondary reserves. The Fund standby agreement will be very helpful in this respect. To support the Argentine program, we intend to bring three new operations for the consideration by the Board during this calendar year. These include an operation to strengthen the social safety net, which is the same kind of operation that we are developing for Mexico, a project aimed at restructuring and privatization of state-owned provincial banks, and a third operation in support of macroeconomic reform and the reform of a number of vital sectors, including private banking. In conclusion, Mr. Chairman, I would like to emphasize that we are keeping a close watch on the developing situation in the region, and are prepared to recommend to the Board new operations whenever the need for them arises. Thank you very much. MR. KAJI: Thank you, Javed. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  47 I just thought the Board would find it useful to get an update of the situation and at least some idea of what we are planning in terms of response to the specific needs of these countries, as they arise. Mr. Autheman. MR. AUTHEMAN: Thank you, Mr. Chairman. I welcome these announcements and I would like to ask two questions to Mr. Burki. To which extent this new lending will be compensated by restructuring and cancellation of existing loans, and what will be in 1995 the overall impact, both on the balance of payments of these countries and on our exposure to these countries? MR. BURKI: We are intensively engaged with the Mexican authorities in reviewing our portfolio. Discussions will be held later this month, and we expect sizable cancellations. It is difficult for me to be very precise about the amount, because at this point the government is engaged in an exercise to determine the impact on government spending of the very significant fiscal retrenchment that they have undertaken. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  48 And as that exercise is completed, it is bound to have an effect on our programs, and we have agreed with the government that there is no point in keeping some of the projects which will not have counterpart funding available on the books. So, we do expect a sizable reduction in our portfolio in Mexico. In Argentina, at this point, we are not contemplating a similar exercise because our exposure remains very low. As the Board would recall, a very large amount of resource commitment by the World Bank to Argentina took the form of program lending, and investment lending is of relatively new origin in Argentina, and is addressing precisely the areas in which the Argentineans need help, which is help to the financial sector, help to the provinces to improve their fiscal systems, and help to the social sectors in order to strengthen the safety net. MR. KAJI: I would just add, Mr. Autheman, that in addition to restructuring of the existing portfolio, there is no question that the pipeline we had, certainly in a country like Mexico, also needs to be revisited. So, all of this is not necessarily incremental to the original pipeline. Some of it is replacing some of that MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  49 pipeline, given the fiscal compression that this country has got to face. Mr. Zhu. MR. ZHU: Thank you, Mr. Chairman. I have a specific question to Mr. Burki about the financial rescue program for the financial crisis. So, originally the proposed program is near $50 billion. A month ago, IMF approved a standby credit, nearly $18 billion, and then the American Government about $20 billion. How about other figures? Do you have some information? Thank you. MR. BURKI: Mr. Chairman, I will be very happy to supply those numbers. I don't have them readily available with me. MR. KAJI: But, Mr. Zhu, one thing you have got to remember that the $50 billion package that you are talking about was really an immediately liquidity crisis type of response. The Bank's response is certainly of a different time frame and addresses different sets of issues. Mr. Montenegro. MR. MONTENEGRO: Thank you, Mr. Chairman. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  50 I just would like to ask Mr. Burki some additional information about the Argentinean operation with the IMF, about the amount and conditions, if possible. MR. BURKI: What I know is what I have seen in the newspapers this morning. There was an agreement with the Fund, and it was announced at six o'clock Argentinean time. I believe it is a standby arrangement which focuses heavily on fiscal retrenchment and a new fiscal program which Mr. Carvalho said he will be announcing either today or tomorrow. The Fund's resources are of the order of about $2 billion. MR. KAJI: Thank you. The meeting is adjourned. [Whereupon, at 11:11 a.m., the meeting was adjourned.] MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666